IOICORP’s 9MFY24 results disappointed. Its 9MFY24 core net profit fell 33% YoY due to lower CPO prices and weaker downstream profits, partially cushioned by higher FFB production and stronger contributions from associates. We cut our FY24-25F core net profit forecasts by 5% and 8%, respectively, but maintain our TP of RM3.80 and MARKET PERFORM call.

IOICORP’s 9MFY24 core net profit of RM863m (excluding RM12m fair value losses and RM89m unrealised forex loss) disappointed at only 70% and 69% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weak downstream operations. As expected, no dividend was declared in 3QFY24.

YoY, its 9MFY24 core net profit fell 33% due to a 10% decline in its average CPO selling price realised and weak downstream profits, partially cushioned by a 4% increase in FFB production and higher profit contributions from associates and JVs (upstream Bumitama Agri reported stronger operating profits but was weighed down by forex losses, while downstream Bunge Loders Croklaan reported improved performance, although we are unable to ascertain if it was operational or due to one-off adjustments).

QoQ, its 3QFY24 core net profit declined by 14% due to seasonally lower FFB harvest (-26%) and weaker downstream earnings, partially cushioned by a 5% increase in it average CPO selling price realised.

Balance sheet. After paying 1HFY24 interim dividends, 3QFY24 ended with net gearing of 16% (RM1.849b), up QoQ from 14% (RM1.617b net debt) but still low.

Outlook. We expect its upstream margins to improve on firm CPO prices while cost pressure stays easier than a year ago and downstream headwinds abate. We maintain our average CPO price assumption of RM3,800/MT in CY24 on modest global edible oil supply increase against demand growth of 3% to 4%. Thus, global inventory is set to decline from a year ago – tighter but still manageable.

Meanwhile, fuel and fertiliser costs are now 10% to 30% lower YoY while FFB output has risen along with palm kernel (PK) prices. A byproduct when milling CPO, PK sales are used to offset CPO cost so good PK prices help to contain CPO cost and PK prices have started picking up after softening since mid-CY22.

Focusing more on specialty and customised products, IOI’s resource- based downstream enjoy better pricing and margins. However, the refining operation continues to face intense competition and tight margins while its operations in Europe are enduring weak demand, rising wages and energy supply pressures. All in all, more meaningful improvement in downstream manufacturing is more likely in FY25.

Pushing further into net zero palm oil, in Jul 2023, IOI Palmwood launched “OnCore” palm-based wood products. An entirely new product, time will be required to be commercially received. Meanwhile, in April 2024, IOI entered into a 45:55 JV with Nextgreen Global Berhad (NGGB) to develop a RM600m, 100,000MT pulp plant using Empty Fruit Bunches (EFB) – the leftover of FFB (Fresh Fruit Bunches) after CPO has been milled out. Subsequently, this JV partnered with Xiamen C&D Corp (XCD) on a 75:25 respectively. NGGB will control and manage the project (including its proprietary patented technology) with XCD focusing on marketing and IOI on upstream support.

Forecasts. We cut our FY24-25F core net profit forecasts by 5% and 8%, respectively, to adjust for a softer downstream outlook.

Valuations. However, we maintain our TP of RM3.80 based on 2.0x FY24F PBV which is within the PBV range of large integrated planters, including a 5% premium to reflect a 4-star ESG rating as appraised by us (see page 3).

Investment case. We like IOICORP for its use of higher yielding planting materials, pro-active adoption of mechanisation and digitalisation to improve productivity, converting oil palm trunks into net zero palm-based wood products or EFB into pulp as well as higher value downstream focus. However, much of the fruits will only bear out in the medium to long term. Whilst earnings should improve over the next one to two quarters, subdued full-year earnings are still expected for FY24-25 on flattish CPO prices with some margin improvement from easier costs. Maintain MARKET PERFORM.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues; (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilisers.

Source: Kenanga Research - 27 May 2024